Professional Level Options Module Advanced Taxation (Singapore) Thursday 7 June 2018 P6 SGP ACCA Time allowed: 3 hours 15 minutes This question paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 4 Do NOT open this question paper until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (SGP) The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the year of assessment 2018 will continue to apply for the foreseeable future. 2. All apportionments should be made to the nearest month. 3. Calculations and workings need only be made to the nearest $. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Goods and services tax Standard rate 7% Registration threshold $1 million Buyer s stamp duty for all properties Purchase price or market value First $180,000 1% Next $180,000 2% Remaining amount 3% Additional buyer s stamp duty for residential properties Foreigners and entities buying a first and subsequent residential property 15% Singapore permanent residents buying a first residential property 5% Singapore permanent residents buying a second and subsequent residential property 10% Singapore citizens buying a second residential property 7% Singapore citizens buying a third and subsequent residential property 10% Seller s stamp duty for residential properties For purchases from 1 January 2017 to 10 March 2017 Property disposed of within one year of purchase 16% Property disposed of within more than one year and up to two years of purchase 12% Property disposed of within more than two years and up to three years of purchase 8% Property disposed of within more than three years and up to four years of purchase 4% For purchases on or after 11 March 2017 Property disposed of within one year of purchase 12% Property disposed of within more than one year and up to two years of purchase 8% Property disposed of within more than two years and up to three years of purchase 4% Seller s stamp duty for industrial properties Property disposed of within one year of purchase 15% Property disposed of within more than one year and up to two years of purchase 10% Property disposed of within more than two years and up to three years of purchase 5% Stamp duty on transfer of shares Purchase price or net asset value of the shares 0 2% 2
Corporate income tax Rate Year of assessment 2018 17% Corporate income tax rebate (capped at $10,000) 20% Partial tax exemption $ First $10,000 of chargeable income is 75% exempt 7,500 Next $290,000 of chargeable income is 50% exempt 145,000 Total 152,500 Full tax exemption for new start-up companies $ First $100,000 of chargeable income is 100% exempt 100,000 Next $200,000 of chargeable income is 50% exempt 100,000 Total 200,000 Central Provident Fund (CPF) Contributions for individuals below the age of 55 years and earning more than $750 per month Employee Employer Rates of CPF contributions 20% 17% Maximum monthly ordinary wages (OW) attracting CPF $6,000 For the year 2017 (i.e. from 1 January 2017 to 31 December 2017) Maximum annual ordinary wages (OW) attracting CPF $72,000 Maximum annual additional wages (AW) attracting CPF $102,000 less OW subject to CPF Personal income tax for the year of assessment 2018 Chargeable income Tax rate Tax $ % $ On the first 20,000 0 0 On the next 10,000 2 0 200 On the first 30,000 200 On the next 10,000 3 5 350 On the first 40,000 550 7 0 2,800 On the first 80,000 3,350 11 5 4,600 On the first 120,000 7,950 15 0 6,000 On the first 160,000 13,950 18 0 7,200 On the first 200,000 21,150 19 0 7,600 On the first 240,000 28,750 19 5 7,800 On the first 280,000 36,550 20 0 8,000 On the first 320,000 44,550 Above 320,000 22 0 3 [P.T.O.
Personal income tax reliefs for the year of assessment 2018 Earned income Standard (max) Handicapped (max) Below 55 years $1,000 $4,000 55 to 59 years $6,000 $10,000 60 years and above $8,000 $12,000 Spouse relief $2,000 $5,500 Qualifying child relief (per child) $4,000 $7,500 Working mother s child relief (WMCR) % of mother s earned income First child 15% Second child 20% Third child 25% Maximum cumulative WMCR 100% Maximum relief per child $50,000 Parent relief Standard (max) Handicapped (max) Not living in the same household $5,500 $10,000 Living in the same household $9,000 $14,000 Grandparent caregiver relief $3,000 Dependent handicapped sibling relief $5,500 Life assurance relief Voluntary CPF contribution of self-employed Course fees $5,000 (max) Capped at $37,740 or 37% of assessable trade income whichever is lower $5,500 (max) NSman Non-key appointment Key appointment holder holder Active NSman $3,000 $5,000 Non-active NSman $1,500 $3,500 Wife/widow/parent of NSman $750 $750 Foreign maid levy relief Supplementary retirement scheme Foreigners Singaporeans and Singapore permanent residents Total amount of personal income tax reliefs $6,360 (max) $35,700 (max) $15,300 (max) $80,000 (max) 4
Section A BOTH questions are compulsory and MUST be attempted 1 Mr Umar Pollard, a citizen of Country U, lives in and is treated as a tax resident of Country U. He owns 100% of Ultimato Corporation Limited (UCL), a company incorporated and tax resident in Country U. UCL carries on a profitable business trading in a diversified range of consumable products for infants and children. Mr Umar wants to expand his business interests into Asia, and he wishes to use Singapore as the launch pad from which to establish his presence in the region. Mr Umar s business development manager has presented him with plans to acquire ordinary share stakes in three profitable companies (Company A, Company B and Company C) with similar businesses as UCL located in Countries A, B and C respectively. It is proposed to acquire a 45% stake in Company A, a 30% stake in Company B and a 15% stake in Company C. The headline tax rates in Countries A, B and C are 30%, 20% and 10% respectively. Mr Umar proposes to set up a new Singapore entity to establish a permanent legal presence in Singapore as a base to make his acquisitions in Companies A, B and C. However, he is unsure whether to set up this new Singapore entity as a branch or as a subsidiary company of UCL. Although initially this new entity will only be a holding structure for the three investment stakes, it is possible that some trading activities may be added in the near future. Whichever entity structure is chosen, funding for the Singapore operations will be provided through equity or debt, either directly by Mr Umar, in his own name, or through UCL. Being a conservative businessman, Mr Umar wants to start small by first occupying only a small office with just two key staff one operations manager and one accountant for the purposes of his Singapore operations. Through his own research, Mr Umar has discovered that there are many tax incentives for inbound investments into Singapore and he is particularly interested in qualifying for these incentives so as to yield the maximum after-tax profits from his business operations in Singapore. Singapore has not concluded a comprehensive tax treaty with any of the Countries A, B, C or U. Required: As the tax adviser to Mr Umar Pollard, write a letter to him advising on the following matters: (i) The similarities and differences in the tax treatment of a subsidiary company and a branch in Singapore and why based on the proposed activities, it would be better for him to use a subsidiary company structure. (9 marks) (ii) The main benefits and the requirements to be satisfied in order for Mr Umar/the new Singapore company to qualify for each of the following tax incentives based on the proposed plans: (1) Start-up tax exemption (SUTE) scheme; (4 marks) (2) Mergers and acquisitions (M&A) scheme. (10 marks) Note: You are not required to provide details of the headquarters tax incentive programme. (iii) The Singapore tax implications arising from financing the new Singapore company by equity or debt provided by Mr Umar, either directly in his own name or indirectly through Ultimato Corporation Limited. (4 marks) (iv) Whether the proposed operations of the new Singapore company will have any goods and services tax (GST) implications. (4 marks) Professional marks will be awarded in question 1 for the appropriateness of the format, presentation and structure of the letter, the effectiveness with which the information is communicated and its logical flow. (4 marks) (35 marks) 5 [P.T.O.
2 Anna, aged 44, is married to Fred, aged 45, who is an inactive national serviceman. Fred is a Singapore chartered accountant, who was employed by a multinational corporation until 31 December 2015. The couple have two children, a son, Kevin, who graduated from a three-year full-time degree course at a local university in December 2017; and a daughter, Jasmine, aged 14. The entire family are Singaporeans. Following his completion of a module in Singapore taxation, Kevin told Anna that she should not concern herself about her eligibility for personal reliefs, other than child reliefs. He said this was because there is an overall cap of $80,000 on the personal reliefs which can be claimed in any year of assessment (YA) and the total child reliefs she can claim for her two children would already be $100,000, given her high employment income and the maximum cap of $50,000 per child. The following details relate to Anna s income and other relevant information pertaining to her tax affairs for YA 2018: 1. She started to work for a Singapore company, F&M Pte Ltd (FMPL), on 1 January 2017 with a monthly salary of $30,000. She was paid a sign-on bonus based on two months salary when she joined FMPL on the condition that she does not leave the company within two years. Anna was made a director of F&M Sdn Bhd (FMSB), the subsidiary of FMPL, which is incorporated and holds its board of directors meetings in Malaysia. On 30 December 2017, she received a director s fee of $80,000 from FMSB which was paid directly to her bank account in Singapore and also a special bonus of $50,000 for her good performance in FMPL. Kevin has advised his mother that her taxable employment income is $490,000. He explained that she should not be taxable on the sign-on bonus in YA 2018 as she had only served one year with FMPL by 31 December 2017. On the other hand, according to Kevin, both of the payments received on 30 December 2017 were clearly taxable. 2. Unknown to FMPL, Anna also carried on business via two separate entities in YA 2018: (i) She operated a sole proprietorship business which was profitable in the year ended 31 December 2016, but in the year ended 31 December 2017 registered a loss of $300,000. In arriving at the amount of this loss, Anna has deducted a salary paid to Fred of $100,000 for taking care of the accounting records of the business for the entire 2017 year. Kevin has advised his mother that a sole proprietorship cannot claim any deductions for salary payments made to close family members. This is despite the fact that Fred performed a similar role for his friend in the year 2016 for an annual salary of $150,000. (ii) She is a partner in the ABC partnership, entitled to a 50% share of the profits and losses. In the year ended 31 December 2017, ABC registered a loss of $50,000 in its accounts. Anna attended an executive training programme at Harvard University costing $10,000 in October 2017, which had been charged to the partnership. Kevin has advised his mother that ABC can claim an additional 300% deduction for this training cost under the productivity and innovation credit scheme and increase its trading loss by $30,000. In addition, in 2017 ABC received interest income from a deposit placed in a foreign bank. Anna s $10,000 share of this interest was credited to her bank account in Singapore in December 2017. Kevin has advised his mother that foreign interest income received in Singapore by an individual is not taxable in Singapore. 3. Anna extended a loan of $500,000 to a good friend in the year 2017 on which she charged interest of $20,000. Kevin has advised his mother that tax is not chargeable on interest income earned by an individual taxpayer. 4. Anna is the sole owner of a fully paid condominium in Singapore which is rented out at a monthly rent of $5,000. Anna has lost the receipts for all of her rental-related expenses, and Kevin has advised his mother that as a result she has no choice but to pay tax on the full amount of the gross rental income. 5. Anna s mother, Peggy, lives in the same household as Anna and Fred, to help look after Kevin and Jasmine. Peggy was unemployed and did not derive any income in the year 2017, except for the monthly allowance of $400 she received from Anna. Anna has a sister, Ariel, who lives in a separate household in Singapore from Anna and her family. Ariel earned a salary of $100,000 in the year 2017 and Kevin has advised his mother to let Ariel claim the parent relief of $5,500 even though this is lower than the $9,000 which could potentially have been claimable by Anna if not for the $80,000 cap on total personal reliefs. Additional information 6. Anna donated shares she owned in a public listed company worth $1,000 to an approved institution of a public character in 2017. The legal transfer of the ownership of these shares was also effected in 2017. 6
7. To take care of the housework, Anna employs a domestic maid and she paid the normal monthly levy of $265 for the entire year 2017. Required: (a) Comment on the validity of the tax advice given by Kevin to his mother, Anna. (b) Compute Anna s minimum individual income tax liability for the year of assessment 2018. (10 marks) (15 marks) (25 marks) 7 [P.T.O.
Section B TWO questions ONLY to be attempted 3 Ovict Pte Ltd (OPL) is a Singapore company engaged in the business of distributing a certain brand of massage chairs (Brand A) in Singapore. The massage chairs are manufactured by OPL s overseas parent company, Povict Hongkong Limited (PHL), which is located in Hong Kong. These Brand A massage chairs are sold by OPL for $7,000 each to local buyers in Singapore. PHL has also appointed Revict Pte Ltd (RPL), another Singapore company unrelated to either OPL or PHL, to distribute another brand of massage chairs (Brand B) in Singapore. The market for both brands of massage chairs (Brand A and Brand B) is similar in that both brands have an equal share of local consumers. The main difference between the two distributorship agreements is that OPL performs certain promotional and marketing functions for PHL, whereas RPL does not. On average, OPL incurs $160 per Brand A massage chair for such functions. RPL earns a gross profit margin of 10% from its sales of Brand B massage chairs to local consumers in Singapore. Required: (a) Identify the types of transfer pricing methods which can be used to derive the transfer price or margin on the sale of products between related parties in Singapore and briefly explain the differences in approach and the factors relevant to the choice of method to use. (10 marks) (b) Based on the information given in the scenario, determine the most appropriate transfer pricing method for the Brand A massage chairs sold to Ovict Pte Ltd by Povict Hongkong Limited, provide an explanation of the rationale for choosing this method and compute the arm s length transfer price. (10 marks) (20 marks) 8
4 Allied Singapore Kingsmen Pte Ltd (ASKPL) is a trading company incorporated and registered for goods and services tax (GST) in Singapore. During the quarter ended 30 September 2017, ASKPL incurred input tax in relation to the provision of the following fringe benefits/expenses to its employees/related personnel: (1) Refreshments provided during accounting training sessions conducted by the chief financial officer for the junior accounting staff. (2) Expatriate employees taxes borne by the company and professional fees charged by the tax agent to prepare their returns of employees remuneration (Form IR8a). (3) Reimbursement in full of managers monthly mobile phone bills, despite the fact that there is clearly some private portion of usage included therein. (4) Reimbursement of medical expenses incurred by an individual member of staff during a visit to a traditional Chinese medicine clinic. (5) A hotel stay for ten days for a regional internal audit manager during his visit to ASKPL to perform audit functions. Required: In respect of each of the fringe benefits/expenses (1) to (5): (a) Explain the deductibility to Allied Singapore Kingsmen Pte Ltd (as employer) and the taxability to the employee/related party (as recipient). (12 marks) (b) Explain the goods and services tax (GST) implications, if any. (8 marks) (20 marks) 9 [P.T.O.
5 You should assume that today s date is 30 November 2017. Miss Deborah Stone is a US national who has been employed for almost two years by Charismatic Sydney Limited (CSL), the Australian subsidiary of Charismatic Corporation Limited (CCL), a US tax resident company. Deborah has recently been informed by CSL that her employment will be terminated on 31 December 2017. Under current tax law in Australia, any compensation payment for loss of office is fully taxable in the hands of the employee. Because of the potential effect of the higher rates of individual income tax in Australia on the compensation payment of $200,000 to be received by Deborah, CCL intends to put in place a consultancy agreement after Deborah s departure from Australia. Under this agreement, Deborah is to receive a payment of the same amount, i.e. $200,000 from Charismatic Pte Ltd (CPL), a wholly-owned subsidiary of CCL, incorporated and tax resident in Singapore, for consultancy services to be rendered after her return to the US. Based on the previous years tax computations submitted to the Inland Revenue Authority of Singapore (IRAS) by CPL, all the expenses incurred by CPL are reimbursed in full by CCL. In addition, CPL receives a service fee from CCL based on 5% of the total expenses reimbursed. CPL is subject to tax in Singapore on this 5% fee without any tax adjustments for non-tax deductible expenses and this basis has been agreed by the Comptroller. However, the Comptroller has also clarified that withholding tax would apply should any of these reimbursed expenses be deemed sourced in Singapore and payable to non-residents. Required: (a) State the purpose of general anti-avoidance legislation and explain the general anti-avoidance provision contained in the Singapore tax legislation. (7 marks) (b) Explain the effect of the proposed payment to Deborah on Charismatic Pte Ltd s (CPL s) income tax position and advise on the risk of any challenge by the Comptroller under the anti-avoidance provisions. (5 marks) (c) State the circumstances in which a management consultancy fee will be subject to withholding tax, and explain whether the payment to be made to Deborah by CPL is likely to be subject to withholding tax and the risk of any challenge by the Comptroller under the anti-avoidance provisions if CPL fails to withhold tax from the payment. (8 marks) (20 marks) End of Question Paper 10